Chapter 5 – Cost Volume Profit – Flashcards
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Cost-Volume-Profit Analysis
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1. CM=Sales-Variable Cost
2. CM goes to cover fixed costs
3. After FC, all remaining CM goes to Income
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The contribution margin ratio is:
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Total CM/Total Sales
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In terms of units, the contribution ratio is:
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Unit CM/Unit Selling Price
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Break-even point in units
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Sales=Variable Expenses+Fixed expenses+Profits
EX. 500x=300x+80,000+0
200x=80,000
x=400 bikes
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Break-Even point in sales dollars
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Sales=Variable Expenses+Fixed expenses+Profits
EX. x=.60x+80,000+0
.40x=80,000
x=$200,000
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Contribution Margin for Break-even point in units sold
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Fixed Costs/Unit CM
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Contribution Margin for break-even point in total sales dollars
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Fixed Costs/CM %
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CVP Formula
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We can use our CVP formula to determine the sales volume needed to achieve a target net profit figure.
Sales=Variable Expenses+Fixed Expenses+Profits
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The Contribution Margin Approach
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Unit sales to attain the target profit =
(Fixed Expenses+Target Profit)/Unit contribution margin
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The Margin of Safety
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Excess of budgeted (or actual) sales over the break-even volume of sales. The amount by which sales can drop before losses begin to be incurred.
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The Margin of Safety Formula
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Budget (Actual) Sales-Break-Even Sales
(higher the margin the lower the risk)
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Define Operating Leverage
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A measure of how sensitive net operating income is to percentage changes in sales. With high leverage, a small percentage increase in sales can produce a much larger percentage increase in net operating income.
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Degree of Operating Leverage
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CM/Net Income
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The Concept of Sales Mix
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Sales mix is the relative proportions in which a company's products are sold. Different products have different selling prices, cost structures, and contribution margins. (do CVP analysis with the cm%)
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Assumptions of CVP Analysis
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1. Selling price is constant
2. Costs are linear
3. In multi-product companies, the sales mix is constant
4. In manufacturing companies, inventories do not change (units produced=units sold)
